Financial Statements For the year ended December 31, 2012
GENERAL INFORMATION Director SABIC Capital B.V. Registered Office Zuidplein 216 1077 XV Amsterdam the Netherlands Auditor Ernst & Young Accountants LLP, the Netherlands - 2 -
Contents Page Report by the Managing Board 4 Financial Statements 6 Statement of Income 7 Statement of Comprehensive Income 8 Statement of Financial Position 9 Statement of Changes in Equity 10 Statement of Cash Flows 11 Notes to the Financial Statements 12 Other Information 29 Appropriation of result for the period 29 Subsequent Events 29 Independent Auditors Report 30-3 -
Report by the Managing Board General (hereafter referenced to as the Company ) is part of a group of companies headed by SABIC Capital B.V., which is part of Saudi Basic Industries Corporation, Riyadh, Kingdom of Saudi Arabia (hereafter referred to as SABIC ), a global manufacturer of chemicals and other basic materials. Business The Company, together with SABIC Capital B.V and SABIC Capital II B.V., is engaged in financing and investment activities for SABIC, outside the Kingdom of Saudi Arabia ( KSA ). The Company s financing is obtained through equity contributions and intercompany loans from SABIC as well as external financing. SABIC has provided the Company with a guarantee under which SABIC undertakes to make available to the Company sufficient funds to meet its payment obligations. Such undertaking is not limited in time or amount. In addition, SABIC has provided guarantees directly to third party lenders in connection with specific long term debt obligations of the Company. Financial review The Company s net financial income increased in 2012 to 5 compared to 3 in 2011 as a result of the overall increased financing activities by 1.3 billion compared to 2011. Group liquidity As of January 2012, the also Company serves as the head of a global cash pool for SABIC companies, outside the KSA. The cash pool is partially funded by the Company s multi-currency revolver facility in order to provide SABIC operating entities with sufficient funding for their operational cash flows. Corporate governance The Company is managed by its direct parent SABIC Capital B.V., which is supervised by a Supervisory Board, which has met two times in 2012 to discuss the Company s overall operations. Risk management and financial instruments As part of SABIC s global Enterprise Risk Management assessment, the Company is assessing its internal and external risks regularly. The Group operates under these established policies, assessing its risks and developing action plans, which are reviewed and followed up as necessary in light of risk evaluations. The Company has limited exposure to market risk, credit risk and liquidity risk on its own financing activities due to its operating model. The Company manages these risks for SABIC s financing activities. The Company ensures that its financial risks are governed by appropriate policies and procedures. The Company further limits its foreign currency exposures through hedging transactions. The Company has derivative financial instruments at the end of 2012 amounting to 1,106 (2011: nil). The Company manages its interest rate risk by having a balanced portfolio of fixed and variable rate loans and borrowings. The Company s policy is to maintain between 50% and 100% of its borrowings at fixed rates. Treasury specialist with the appropriate skills, experience and supervision carry out all derivative activities. It is SABIC s policy that no trading in derivatives for speculative purposes shall be undertaken. The Managing Board of the Company s parent reviews and manages each of these risks related to its financing activities. Human resources The Company has no employees. - 4 -
Industry outlook The Company s ability to source financing is partially depending on the availability of funding in the market. The Company s ability to borrow externally is strengthened by SABIC s corporate guarantee to make available sufficient funds to the Company to meet its payment obligations. Amsterdam, April 25, 2013 represented by its sole Managing Director SABIC Capital B.V. /s/ M.A. Khan M.A. Khan /s/ M.R. De Groot M.R. De Groot - 5 -
Financial Statements For the year ended December 31, 2012-6 -
Statement of Income For the year ended December 31, Notes 2012 2011 Financial income 3 326 253 Financial expense 4 (321) (250) Income before taxes 5 3 Income tax expense 5 (1) (1) Net income for the period 4 2 Attributable to: Owners of the Company 4 2 Net income 4 2 See accompanying notes to the financial statements - 7 -
Statement of Comprehensive Income For the year ended December 31, 2012 2011 Net income 4 2 Other comprehensive income: Other comprehensive income Total other comprehensive income, net of tax* Total comprehensive income, net of tax 4 2 Attributable to: Owners of the Company 4 2 Total comprehensive income, net of tax 4 2 *There is no tax impact on the (loss) gain available for sale investments and the foreign currency translation. See accompanying notes to the financial statements - 8 -
Statement of Financial Position At December 31, Notes 2012 2011 Assets Non-current assets Other financial assets 6 4,813 5,768 4,813 5,768 Current assets Other financial assets 6 2,183 Other receivables 7 18 65 Cash and cash equivalents 84 1 2,285 66 Total assets 7,098 5,834 Equity and liabilities Equity Equity attributable to owners of the Company 8 11 57 11 57 Non-current liabilities Interest bearing loans and borrowings 9 5,568 5,766 Deferred tax liabilities 5 5,568 5,766 Current liabilities Current liabilities, interest-bearing 9 1,479 Other payables 10 35 11 Derivatives 11 5 1,519 11 Total liabilities 7,087 5,777 Total equity and liabilities 7,098 5,834 See accompanying notes to the financial statements - 9 -
Statement of Changes in Equity Other Issued Share Retained capital * reserves premium earnings Total Balance at January 1, 2011 51 3 1 55 Net income for the year 2 2 Total comprehensive income for the year 2 2 Balance as at December 31, 2011 51 5 1 57 Net income for the year 4 4 Total comprehensive income for the year 4 4 Dividend declared (50) (50) Balance as at December 31, 2012 1 9 1 11 *Issued capital amounts to 18,000. See accompanying notes to the financial statements - 10 -
Statement of Cash Flows For the year ended December 31, 2012 2011 Operating activities Net income 4 2 Add back: Interest revenue and expense (5) (2) Adjustments to reconcile income before tax to net cash flows: Amortization debt issuance costs related to other financial assets (2) (1) Amortization fair value other financial assets for the period 10 10 Amortization debt issuance costs charged related to interest bearing loans and borrowings 2 1 Amortization fair value interest bearing loans and borrowings for the period (10) (10) Change in SABIC group funding: Proceeds of intercompany funding 570 2,321 Repayment of intercompany funding (1,204) (2,471) Proceeds of third party funding 690 211 Repayments of third party funding (61) Interest paid (145) (110) Guarantee fee paid (34) Interest received 148 112 Guarantee fee received 20 34 Change in working capital: Receivables 1 (3) Current liabilities non-interest-bearing 4 2 Net cash provided by operating activities 83 1 Net increase in cash and cash equivalents 83 1 Cash and cash equivalents at beginning of financial period 1 Cash and cash equivalents at December 31 84 1 See accompanying notes to the financial statements - 11 -
Notes to the Financial Statements 1. Corporate information (hereafter referred to as the Company ) was incorporated on September 3, 2008 as a private company with limited liability ( besloten vennootschap met beperkte aansprakelijkheid ) in accordance with the laws of The Netherlands and registered at the trade register of the Chamber of Commerce in the Netherlands with registered number 14105351. The Company, having its legal seat in Amsterdam, the Netherlands, is a direct wholly-owned subsidiary of SABIC Capital B.V. and an indirect wholly owned subsidiary of Saudi Basic Industries Corporation ( SABIC ) a Saudi Arabian joint stock company based in Riyadh, Kingdom of Saudi Arabia ( KSA ). SABIC is engaged in the manufacturing, marketing and distribution of chemical, fertilizer and metal products in global markets. The primary purpose of the Company is to act as a financing and investment company for SABIC subsidiaries outside the KSA. The Company s financing is ensured through equity contributions and intercompany loans as well as external financing. The Company has a guarantee from SABIC to receive sufficient funds to ensure compliance with all of its payment obligations to creditors. The financial statements of the Company for the year ended December 31, 2012 were approved on April 25, 2013. The financial statements are subject to adoption by the Annual General Meeting of the Shareholder. 2. Basis of preparation and accounting policies 2.1 Basis of preparation The financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ) and it s Interpretations as adopted by the International Accounting Standards Board ( IASB ) and endorsed by the European Union ( EU ) and in accordance with Part 9, Book 2 of the Dutch Civil Code. The accounting principles used to prepare the financial statements are based on historical cost, unless stated otherwise. An asset or liability is classified as current when it is expected to be realized or settled within 12 months after the balance sheet date. Financial assets and financial liabilities are offset and the net amount reported in the statement of financial position if there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realise the assets and settle the liabilities simultaneously. 2.2 Significant accounting judgements, estimates and assumptions The preparation of the Company s financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the disclosure of contingent liabilities, at the reporting date. However, uncertainty about these assumptions and estimates could result in outcomes that could require a material adjustment to the carrying amount of the asset or liability affected in the future. The estimates and assumptions are based upon experience and various other factors that are believed to be reasonable under the circumstances and are used to judge the carrying values of assets and liabilities that are not readily apparent from other sources. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised or in the revision period and future periods if the changed estimates affect both current and future periods. - 12 -
2.3 Changes in accounting policies and disclosures The accounting policies adopted are consistent with those of previous year. The Company has not early adopted any of the following new and amended standards and interpretations issued, which potentially could be applicable to the Company but which are not effective for the financial year beginning January 1, 2012: IAS 1 Financial Statement Presentation Presentation of Items of Other Comprehensive Income. The amendments to IAS 1 change the grouping of items presented in other comprehensive income ( OCI ), together with the tax impact, into items that could be reclassified (or recycled ) to profit or loss at a future point in time and items that will never be reclassified. The amendment affects presentation only and has no impact on the Company s financial position or performance. The amendment becomes effective for annual periods beginning on or after July 1, 2012 and will therefore be applied in the Company s first financial statements after becoming effective. IAS 32 Offsetting Financial Assets and Financial Liabilities Amendments to IAS 32. These amendments to IAS 32 clarify the meaning of currently has a legally enforceable right to set-off. The amendments also clarify the application of the IAS 32 offsetting criteria to settlement systems (such as central clearing house systems) which apply gross settlement mechanisms that are not simultaneous. These amendments are not expected to impact the Company s financial position or performance and become effective for financial periods beginning on or after January 1, 2014. IFRS 7 Financial Instruments: Disclosures Offsetting Financial Assets and Financial Liabilities Amendments to IFRS 7. The amendments require an entity to disclose information about rights to set-off and related arrangements (e.g. collateral agreements). The additional disclosures would provide users with information that is useful in evaluating the effect of netting arrangements on an entity s financial position. The new disclosures are required for all recognized financial instruments that are set off in accordance with IAS 32 Financial Instruments: presentation. The disclosures also apply to recognized financial instruments that are subject to an enforceable master netting agreement or similar agreement, irrespective of whether they are set off in accordance with IAS 32. These amendments will not impact the Company s financial position or performance and become effective for annual periods beginning on or after January 1, 2013. IFRS 9 Financial Instruments: Classification and Measurement. IFRS 9 as issued reflects the first phase of the IASBs work on the replacement of IAS 39 and applies to classification and measurement of financial assets and financial liabilities as defined in IAS 39. The standard was initially effective for annual periods beginning on or after January 1, 2013, but amendments to IFRS 9, Mandatory Effective Date of IFRS 9 and Transition Disclosures, moved the mandatory effective date to January1, 2015. The adoption of the first phase of IFRS 9 could potentially have an effect on the classification and measurement of the Company s financial assets, but is expected to have no impact on classification and measurement of financial liabilities. The Company will quantify the effect in conjunction with other phases, when the final standard including all phases is issued. IFRS 13 Fair Value Measurement. IFRS 13 establishes a single source of guidance under IFRS for all fair value measurements. IFRS 13 does not change when an entity is required to use fair value, but rather provides guidance on how to measure fair value under IFRS when fair value is required or permitted. The Company is currently assessing the impact that this standard will have on the financial position and performance, but based on preliminary analysis, no material impact is expected. The standard becomes effective for annual periods beginning on or after January 1, 2013. - 13 -
Annual Improvements May 2012 In May 2012, a number of improvements to existing standards were issued. These improvements are effective for annual periods beginning on or after January 1, 2013. These improvements will not have an impact on the Company s financial position or performance. Other new and amended standards and interpretations issued, but not yet effective, are not considered applicable to the Company now and in the foreseeable future. 2.4 Summary of significant accounting policies Foreign currency translation The Company s financial statements are presented in US dollar, which is also the functional currency of the Company. Transactions and balances Transactions in foreign currencies are initially recorded by the Company at their respective functional currency spot rates prevailing at the date the transaction first qualifies for recognition. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency spot rate of exchange at the reporting date. All the Company s differences arising on settlement or translation of monetary items are recognised in the statement of income. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined. The gain or loss arising on retranslation of non-monetary items is treated in line with the recognition of gain or loss on change in fair value of the item. Based on a management re-assessment of the Company s currency cash flows, the Company has changed its functional currency as of January 1, 2012 from Euro into US dollar. The change of the functional currency had no significant impact on the statement of changes in equity and the statement of income as all loans received are offset by similar loans given. The balance sheet items at December 31, 2011 have been translated with the year end 2011 rate and the income statement items for the year ended at December 31, 2011 have been translated with the year 2011 average rate. The functional currency spot rates of exchange of the Euro versus the US dollar used in drawing up the financial statements at December 31, 2012 is 1.32 (December 31, 2011: 1.29). The average currency rate of exchange of the Euro versus the US dollar for the year 2012 is 1.29 (2011: 1.39). Financial income and expense For all financial instruments measured at amortised cost and interest bearing financial assets classified as available for sale, interest income or expense is recorded using the effective interest rate ( EIR ), which is the rate that exactly discounts the estimated future cash payments or receipts over the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or liability. Interest income (or expense) is included in financial income (or expense) in the statement of income. Premiums, discounts and transaction costs on loans are carried as an adjustment to interest expenses, spread over the term of the loans concerned. Expenses Operating costs are recognized on a historical cost basis. - 14 -
Income taxes Together with related party SABIC Capital II B.V., the Company is part of a fiscal unity headed by SABIC Capital B.V. The standard conditions for a Dutch fiscal unity stipulate that all companies included in the fiscal unity are jointly and severally liable for all tax liabilities due by the tax parent company until the tax unity ceases. The Company s individual corporate income tax is calculated on a stand-alone basis. Current income tax Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted at the reporting date. Management periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate. Deferred income tax Deferred income tax is provided using the liability method on temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax liabilities are recognized for all the Company s taxable temporary differences. Deferred tax assets, if any, are recognized for all deductible temporary differences, carry forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of the Company s unused tax credits and unused tax losses can be utilised. The carrying amount of deferred tax assets, if any, is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Unrecognized deferred tax assets are reassessed at each reporting date and are recognized to the extent that it has become probable that the Company s future taxable profit will allow the deferred tax asset to be recovered. Deferred tax assets and liabilities are measured at the statutory tax rate that is expected to apply in the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date. Deferred tax assets and deferred tax liabilities are offset in the Dutch fiscal unity, to the extent that these reverse in the same period. Total comprehensive income Total statement of comprehensive income consists of the Company s net result. Financial assets Financial assets within the scope of IAS 39 Financial Instruments: Recognition and Measurement are classified as financial assets at fair value through statement of income, as loans and receivables, as held to maturity investments, as available for sale financial assets, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. The Company determines the classification of its financial assets at initial recognition. All financial assets are recognized initially at fair value plus transaction cost, except in the case of financial assets recorded at fair value through profit or loss. The Company s financial assets include cash and cash equivalents, other receivables and loans. - 15 -
Other financial assets Other financial assets comprise of non-current loans and receivables. After initial measurement, loans and receivables are measured at amortized cost using the effective interest rate method, less impairment. Amortized cost is calculated taking into account any discount or premium at acquisition. Losses arising from impairment, if any, are recognized in financial expense. Other receivables Other receivables include current loans and receivables and are stated at amortized cost, using EIR, which generally corresponds to face value, less impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortisation is included in finance income in the statement of income. Losses arising from impairment, if any, are recognised in the statement of income in finance costs. Cash and cash equivalents Cash and short-term deposits in the balance sheet comprise cash at banks and on hand and short term deposits with an original maturity of three months or less. Impairment of financial assets The Company assesses, at each reporting date, whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred loss event ) and that loss event has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment, if any, may include indications that debtors or a group of debtors are experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter into bankruptcy or other financial reorganisation and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. Financial liabilities Financial liabilities within the scope of IAS 39 Financial Instruments: Recognition and Measurement are classified as financial liabilities at fair value through profit or loss, loans and borrowings, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. The Company determines the classification of its financial liabilities at initial recognition. All financial liabilities are recognized initially at fair value and, in the case of loans and borrowings, net of directly attributable transaction costs. The Company s financial liabilities include interest bearing loans and borrowings and other payables. Interest bearing loans and borrowings After initial measurement, interest bearing loans and borrowings are subsequently measured at amortized cost using EIR. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortisation is included in finance cost in the statement of income. Deferred debt issuance costs Deferred debt issuance costs are accounted for in accordance with IAS 39 Financial Instruments: Recognition and Measurement and represent an adjustment to the initial carrying amount of debt. These costs are amortized over the life of the debt and increase the amount of interest expense recognized on the debt. - 16 -
Other payables Other payables are stated at amortized cost, which generally corresponds to face value. De-recognition of financial assets and liabilities Financial assets A financial asset or, where applicable a part of a financial asset or part of a group of similar financial assets is derecognized when: The rights to receive cash flows from the asset have expired; or The Company has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a passthrough arrangement; and either (a) the Company has transferred substantially all the risks and rewards of the asset, or (b) the Company has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. When the Company has transferred its rights to receive cash flows from an asset or has entered into a passthrough arrangement, it evaluates if and to what extent it has retained the risks and rewards of ownership. When it has neither transferred nor retained substantially all the risks and rewards of the asset, nor transferred control of the asset, the asset is recognized to the extent of the Company s continuing involvement in the asset. In that case the Company also recognized an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Company has retained. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Company could be required to repay. Financial liabilities A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a de-recognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in the statement of income. Offsetting of financial instruments Financial assets and liabilities are offset and the net amount reported in the statement of financial position if there is a currently enforceable right to offset the recognized amounts, and there is an intention to settle on a net basis, or to realize the assets and settle the liabilities simultaneously. Statement of cash flows The Company uses the indirect method to prepare the statement of cash flows. Cash flows in foreign currencies are translated at average exchange rates. - 17 -
3. Financial income The statement of income includes the following financial income for the year ended December 31: 2012 2011 Interest income related parties 323 252 Interest income third parties 3 1 Total financial income 326 253 Included in interest income from related parties is a guarantee fee in the amount of 25 (2011: 34) to cover the guarantee support fee payable to SABIC (see also Note 4). 4. Financial expense The statement of income includes the following financial expense for the year ended December 31: 2012 2011 Interest expense related parties 208 127 Interest expense third parties 88 89 Guarantee support fee owed to SABIC 25 34 Total financial expense 321 250 5. Corporate income tax In 2012, the current tax charge recorded in statement of income amounted to 1 (2011: 1). There is no difference between the domestic income tax charge of 25% (2011: 25%) and the effective tax charge. The net deferred tax liability of 0.1 at December 31, 2012 (December 31, 2011: 0.1) consist of a deferred tax asset of 4.0 and a deferred tax liability of 4.0. The deferred tax liability relates to the tax effect on the difference between the amortized cost value and the nominal value of certain loans (reference is made to Note 6 and Note 9). The Company expects the deferred tax liability to be settled in the coming years. 6. Other financial assets Other financial assets comprise of the following at December 31: 2012 2011 Loans to affiliated companies 4,751 5,707 Loan to third parties 62 61 Total other financial assets 4,813 5,768-18 -
Loans to affiliated companies Effective interest rate Maturity 2012 2011 Loan to SABIC International 6.67% 2013 979 950 Loan to SABIC International 4.23% 2015 995 994 Loans to SABIC International 3.89% 8.85% 2018 1,368 1,292 Loans to SABIC International 5.50% 5.70% 2021 2,388 2,321 Revolving credit facility Euribor + 250 bps 2013 150 Cash pool Floating inter-day % + 25 bps 1,204 Total loans to affiliated companies 6,934 5,707 Less: Current portion of long term loans 979 Cash pool 1,204 Total current other financial assets 2,183 Total non-current loans to affiliated companies 4,751 5,707 Other financial assets consist primarily out of intercompany loans to SABIC International Holdings B.V. (referred to as SABIC International and formerly known as SABIC Holding Europe B.V.), which are subsequently further lent on to SABIC operating companies, outside the KSA. The Company also holds a participation, jointly with external parties, in a syndicated facility extended to affiliated companies. Intercompany loans The Company s 750 intercompany loan (989), which matures on November 26, 2013, carries a fixed coupon of 5.53%. Based on the effective interest rate of 6.67% (which includes a guarantee fee), an amortization amount of 10 (2011: 10) was added to the carrying amount of the loan in the current financial year, resulting in an amortized cost for a net value of 979 (2011: 950). This loan matures in 2013 and is therefore reclassified to current receivables. The Company s 1,000 intercompany loan, which matures November 2, 2015, carries a fixed coupon of 4.03%. The effective interest rate was 4.23%. The revolver credit facility is accounted for using amortized costs with a net value of 995 (2011: 994). The difference is capitalized as debt issuance costs over which an amount of 2 was amortized in 2012 (2011: 1). From December 2008 through April 2010 the Company issued intercompany loans to SABIC International amounting to 1,368 (2011: 1,292). All these borrowings have a maturity date March 31, 2018 and bear fixed rates varying from 7.18% to 8.85%. Two EUR denominated loans were converted into one US dollar denominated loan, whereby the new fixed rate was set at 3.89%. For accounting purposes, these modifications resulted in the de-recognition and recognition of the original loan and modified loan, respectively, with no impact to the statement of income. - 19 -
During August and November 2011, the Company issued intercompany loans to SABIC International for an amount of 2,388 (2011: 2,321). All these borrowings have a maturity date December 31, 2021 and the interest rates are fixed varying from 5.50% to 5.70% and payable at every quarter. Interest payments (for an amount of 67) of the 3 rd and 4 th quarter 2012 were waived and capitalized to the loan amount. Intercompany revolving credit facility In September 2010, the Company has entered into a three-year intercompany committed unsecured revolving credit agreement with related party SABIC Innovative Plastics Holding B.V. (further referred to as SABIC Innovative Plastics) for a nominal amount of 1,000, which as per December 31, 2012, was unused (2011: 150). Cash pool Since the course of 2012, the Company serves as the head of a global cash pool for the SABIC entities outside the KSA. The cash pool is partially funded by the Company s multi-currency revolver facility in order to provide SABIC operating entities with sufficient funding for their operational cash flows. Loan to third parties The loan to third parties amounting to 62 (2011: 61), represents a syndicated facility in which the Company participates, jointly with other external lenders, in the senior secured term loan B of SABIC Innovative Plastics and its subsidiaries. This syndicated facility was executed in August 2011 and bears interest at floating rate LIBOR for US dollar or EURIBOR for Euro, as appropriate, plus a specified margin of 125 bps. Based on its terms and conditions, the Company s participation in the facility is considered a third party loan. 7. Other receivables Other receivables 2012 2011 Receivables from related parties 6 53 Accrued interest from related parties 12 12 Total other receivables 18 65 The accrued interest from related parties relates to the interest to be received on intercompany loans (reference is made to Note 6). These receivables are not overdue. 8. Equity At December 31, 2012 and 2011, respectively, the Company s issued capital amounts to 18,000, distributed over 18,000 ordinary shares with a par value of 1 per share. The authorized share capital amounts to 90,000 consisting of 90,000 ordinary shares with a par value of 1 per share. Dividends paid The Company distributed a dividend of 50 in 2012 (2011: nil) to its parent. - 20 -
9. Interest bearing loans and borrowings Effective interest rate Maturity 2012 2011 Eurobond 5.64% 2013 979 950 US dollar bond 3.19% 2015 995 994 Multicurrency revolving credit facility Libor/Euribor + 40 bps 2016 820 211 Intercompany loans SABIC 3.86% 8.82% 2018 1,365 1,290 Intercompany loans SABIC 5.47% 5.67% 2021 2,388 2,321 Cash pool Floating inter-day % - 25 bps 420 Bank overdrafts 80 Total interest bearing loans and borrowings 7,047 5,766 Less: Current portion of long term external loan 979 Cash pool 420 Bank overdrafts 80 Current liabilities, interest-bearing 1,479 Total non-current loans and borrowings 5,568 5,766 Eurobond The Eurobond of 750 (989) is listed on the non-regulated market in London, United Kingdom, and is recorded at amortized cost for a net initial value of 714. Based on the effective interest rate of 5.64% (excluding the guarantee fee to be paid to SABIC), an amortization amount of 10 (2011: 10) was added to the carrying amount of the loan in the current financial year, resulting in an amortized cost for a net value of 979 (2011: 950). The bond matures in 2013 and is therefore reported as part of current liabilities. US dollar bond The Company s 1,000 US dollar bond, which matures on November 2, 2015, carries a coupon of 3% and is listed on the non-regulated market in London, United Kingdom. The effective interest rate, including amortization of debt issuance cost, is 3.19% (excluding the guarantee fee to be paid to SABIC). The bond is accounted for against amortized costs for a net value of 995 (2011: 994). The difference is capitalized as debt issuance costs of which an amount of 2 was amortized in 2012 (2011: 1). Multicurrency revolving credit facility In June 2011, the Company, together with SABIC Capital B.V. and SABIC Capital II B.V., entered into a five-year multicurrency revolving credit facility totalling 2,000 with a syndicate of banks. This facility bears interest at floating rate LIBOR for US dollar or EURIBOR for Euro, as appropriate, plus a specified margin. The Company as of December 31, 2012 has drawn 820 (2011: 211) on this facility. The total unused amount of this facility at the end of 2012 amounted to 857 (2011: 1,571). - 21 -
Intercompany loans from SABIC Since its inception, the Company received several intercompany loans from SABIC amounting to 1,365 (2011: 1,290). All these borrowings have a maturity date of March 31, 2018 and bear pay-in-kind fixed rates varying from 6.15% to 8.82%. Two EUR denominated loans were converted into one US dollar denominated loan whereby the new fixed interest rate was set at 3.86%. For accounting purposes, these modifications resulted in the de-recognition and recognition of the original loan and modified loan respectively, which had no impact on the income statement. The intercompany loans received in August and November 2011, amounting to 2,388 (2011: 2,321), have a maturity date of December 31, 2021 and bear fixed rates varying from 5.47% to 5.67%. The interest is payable every quarter end. Interest payments (for an amount of 66) of the 3 rd and 4 th quarter 2012 were waived and capitalized to the loan amount. Cash pool Since 2012, the Company serves as the head of a global cash pool for SABIC entities, outside the KSA, to provide sufficient funding for their operational cash flows. The cash pool is partially funded by the Company s multi-currency revolver facility. 10. Other payables 2012 2011 Income tax due to related party 2 1 Payables to related parties 1 Guarantee fee 25 Accrued interest 8 9 Total other payables 35 11 The guarantee fee is payable to SABIC. Accrued interest relates to interest to be paid on the Eurobond and the US dollar bond. 11. Derivatives Derivatives assets 2012 2011 Derivatives liabilities 5 Total current derivatives 5 Current derivatives The current derivative liability results from the Company s foreign currency swap program with total open notional amounts of 158, 620 and 80, entered into in December 2012. The objective of the program is to minimize the liquidity risk associated with the Company s multi-currency global cash pool. The program consists of a series of rolling foreign currency swaps in which there is a simultaneous purchase or sale of a currency versus the USD with two different values dates (spot and forward). The only exposure on the net position is related to forward point differences. - 22 -
12. Commitment and contingencies Financial indebtedness and guarantees On February 14, 2009, the SABIC Capital Group entered into a guarantee agreement with SABIC, whereby SABIC guarantees that sufficient funds will be available to meet any payment obligation. Such undertaking is not limited in time or amount. In addition, third party lenders to the Group have received direct SABIC guarantees with respect to the 750 Eurobond and the 1,000 US dollar bond to the holders of the bonds until maturity. With respect to the syndicated lender group who provided the multi-currency revolver facility, SABIC issued guarantees to all individual participating lenders for their part of the facility until maturity. The Company being part of a fiscal unity is jointly and severally liable for all tax liabilities due by the tax parent company until the tax unity ceases. The Company is also included in a Dutch Value Added Tax ( VAT ) unity headed by SABIC International. The Company has provided bank guarantees in the amount of 247 on behalf of other SABIC operating companies outside the KSA. 13. Related party transactions During 2012 and 2011, the Company has had regular and non-recurring business transactions with companies owned by its ultimate parent company, SABIC. These companies are being referred to as related parties. The majority of the transactions presented in the statement of income and the statement of financial position are with SABIC and SABIC International. All relations and transactions with related parties, including but not limited to service fees for treasury, tax and group reporting activities, financial income and financial expenses, have been included as follows in the statement of income and the statement of financial position: Statement of income: For the year ended 2012 2011 Interest income 298 218 Guarantee support fee received 25 34 Financial expense (208) (127) Guarantee support fee (25) (34) Cost recharged to other SABIC companies 1 Statement of financial position: As of December 31 2012 2011 Other financial assets loans receivable 4,751 5,707 Other financial assets current 2,183 Other receivables 18 65 Loans payable (3,753) (3,611) Current liabilities, interest-bearing (420) Income tax due to head of fiscal unity (2) (1) Other payables (25) (1) - 23 -
Terms and conditions of transactions with related parties The transactions with related parties are made at terms equivalent to those that prevail in arm s length transactions. Outstanding balances at year-end are unsecured, interest free and settlement occurs in cash. There have been no guarantees provided or charged on for any related party receivables or payables, other than disclosed in Note 12. For the year ended December 31, 2012, the Company has not recorded any impairment of receivables relating to amounts owed by related parties (2011: nil). This assessment is undertaken each financial year through examining the financial position of the related party and the market in which the related party operates. 14. Financial risk management objectives and policies The Company s principal financial liabilities comprise loans and borrowings and other payables contracted to raise funding for further financing operations of SABIC, outside the KSA. The Company s financial assets include intercompany loans and other receivables, participation in the Syndicated facility (Reference is made to Note 6), and cash and short-term deposits that arrive directly from its financing activities. The Company has limited exposure to market risk, credit risk and liquidity risk on its own financing activities due to its operating model. The Company ensures that it s financial risk-taking activities are governed by appropriate policies and procedures and that financial risks are identified, measured and managed in accordance with group policies and group risk profile. The Company does have derivative financial instruments at the end of 2012 amounting to 1,106 (2011: nil). The Board of Directors reviews and manages each of these risks, which are summarised below. Market risk Market risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices. Market prices comprise three types of risk: interest rate risk, currency risk and other price risk. Financial instruments affected by market risk include loans and borrowings and available for sale investment. Interest rate risk Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company manages its interest rate risk by having a balanced portfolio of fixed and variable rate loans and borrowings. The Company s policy is to maintain between 50% and 100% of its borrowings at fixed rates. To manage this, the Company may enter into interest rate swaps if necessary, in which the Company agrees to exchange, at specified intervals, the difference between fixed and variable rate interest amounts calculated by reference to an agreed-upon notional principal amount. As per the end of 2012 and 2011, the Company had only limited exposure to the risk of changes in market interest rates as all the Company loans received and lent carried fixed interest rates, except for the multicurrency revolving credit facilities. Furthermore, the interest rate risk for the Company is limited as all loans are back to back using the same interest rate plus a mark-up for the interest on the loan receivables. The interest rate exposure on the receivable in 2012 amounts to 34 (2011: 50). The interest rate is based on 1 month LIBOR. Interest rate sensitivity The following table demonstrates the sensitivity to a reasonably possible change in interest rates, with all other variables held constant, of the Company s profit before tax. - 24 -
Increase (decrease) in basis points Effect on income (loss) before taxation * 1 month LIBOR December 31, 2011 versus December 31, 2012 9 0.03 1% charge 100 0.34 * Effect on equity equals effect on income before taxation. Foreign currency risk The Company operates in international markets and is primarily exposed to foreign exchange risk arising from loan related EUR exposures. Foreign exchange risk arising from loans denominated in EUR is limited to the Company as the cash outflows or loans issued, are offset, through a natural hedge, by cash inflows and loans received. The effect of a reasonable change in result before taxation is assessed as not material. As of January 2012, the Company serves as the header of a global cash pool for SABIC companies outside the KSA. The cash pool is partially funded by the Company s multi-currency revolver facility to provide SABIC operating entities with sufficient funding for their operational cash flows. For the foreign currency risks resulting from the cash pool activities the Company has a currency swap program. The objective of the program is to minimize the liquidity risk associated with the Company s multicurrency global cash pool. The program consists of a series of rolling foreign currency swaps in which there is a simultaneous purchase or sale of a currency versus the USD with two different values dates (spot and forward). The only exposure on the net position is related to forward points difference. Credit and counterparty risk Credit risk is the risk that counterparty will not meet its obligations under a financial instrument or contract, resulting in a financial loss. The Company is exposed to credit risk from its financing activities, including loans to other SABIC companies, outside the KSA, deposits with banks and financial institutions, foreign exchange transactions and other financial instruments. The Company has a policy to manage exposure to counterparty risk represented by possible defaults on financial instruments by monitoring the concentration of risk that it has with any individual bank or counterparty and through the use of minimum credit quality standards for accepting counterparties. As per the end of 2012, the Company had financial instruments in place with third parties. As of December 31, 2012, the Company has financing activities mainly with related parties, primarily through SABIC International. With respect to loans issued to related parties, the Company acts as intermediate between SABIC or the capital markets and the related party companies whereby it bears a predefined and limited credit risk. With respect to the intercompany loans by the Company to SABIC International for which the Company has borrowed a corresponding amount from SABIC, individual limitation of recourse letters have been entered into between the three companies, whereby, among others, the Company s exposure to a default of the borrower under the intercompany loan agreement is limited to the maximum amount of 3 ( 2) per intercompany loan and the assignment of such intercompany loan to SABIC. With respect to the issuance of the fixed rate Eurobond in December 2008 and the US dollar bond issuance during November 2010, SABIC has issued a direct guarantee for the benefit of the bondholders. With respect to the syndicated revolving credit facilities arranged in 2011, SABIC has issued a direct guarantee for the bank lenders. - 25 -
Liquidity risk The Company monitors its risk of a shortage of funds using forecasting models to model impacts of operational activities on overall liquidity availability. The Company s objective is to maintain a balance between continuity of funding and flexibility through the use of various sources of liquidity. The tables below summarize the maturity profile of the Company s financial liabilities at December 31, based on undiscounted contractual payments: Within 1 year Between 1 and 5 years More than 5 years Total At December 31, 2012 Interest bearing loans and borrowings 1,197 2,412 4,768 8,377 Cash pool 420 420 Bank overdrafts 80 80 Other payables 35 35 Derivatives 1,106 1,106 At December 31, 2011 Interest bearing loans and borrowings 300 3,218 4,379 7,897 Other payables 11 11 The increase in future undiscounted contractual payments is caused by the increase of interest bearing loans and borrowings and because all payable interest on the intercompany loans is being added to the principal amount of the loan. The capitalised interest is added to the principal loan amount and, as from that moment, also becomes interest bearing. Capital management Capital represents equity attributable to the owners of the Company. The primary objective to the Company s capital management is to support SABIC s business, outside the KSA, and maximize shareholder value. The Company manages its capital structure and makes adjustments to it, in light of changes in economic conditions. No changes were made in the objective, policies or processes in 2012. Fair values The Company has categorized its financial assets and liabilities into a three-level fair value hierarchy, based on the nature of the inputs used in determining fair value. The hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Following is a description of each category in the fair value hierarchy and the financial assets and liabilities of the Company that are included in each category at December 31, 2012: Level 1: Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market. Level 2: Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 3: Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management s own assumptions about the assumptions a market participant would use in pricing the asset or liability. - 26 -